Newbie Questions V1 Question 5 (Property Management)
This is for the Newbies considering buying rental property.
Some newbies will avoid Rentals for the reason that they don't want to hassle with tenants.
Some will avoid Rentals because they have no clue how to fix problems that would be encountered along the way. Plumbing Problems, Leaky Roofs, Electrical Problems, etc.
So what is a Newbie to do?
There are 3 roads to take when dealing with rentals and repairs.
One route is using a property management group to take care of the things that you won't or can't do yourself during the time you hold onto a rental.
A second route is to hire a handy man to do the work and call on him everytime you have a problem that needs fixing on your property. This may or may not be as costly as hiring a property management group.
A third route is is to put a tenant/manager in one of the units. This is probably best with 4 plexes and above. Basically you find a tenant that is handy and offer to give them a break on their rent in exhange for take care of the needs of the rest of the tenants.
So, this brings up all sorts of questions. This is where the Veterans can step up and answer.
What is a reasonable amount charged by a property management company? Is it a % of the income generated by the property or is some other means used to calculate the fee? Do you have to sign a contract with a property management group for a certain period of time? How do you go about finding a good property management group?
How much should you expect to pay a handy man the works for you? What are the insurance and tax implications of such a deal? Is this a better route than going with a Property Management Group?
How about the same above question concerning a Tenant/Manager?
Ok Pros. Please respond to the questions posed so the newbie that is considering rentals has an idea of what that need to do.
Thanks
Rick G.
I'm not a pro, but here is what I can help you with...
A property management company typically charges between 5% and 10% of the monthly rent to manage the property. Also, when a rental goes vacant, they charge between half to a full month's rent to find/interview/replace the tenant.
Yes, you typically have to sign a contract. I haven't found a company where you did not.
-Chris
[addsig]
Ok,
There are still a lot of unanswered questions in this post.
The information that the answers will provide will be very helpful to the newbies as well as some of the rest of us.
Veterans. Steps up and respond. We need your help.
Rick G.
Ok,
Trying one more time with these questions.
What should you pay a good handy man to take care of your properties? How do you go about finding a good handy man?
Rick G.
How would you handle monthly rent collections? I live approximately 120 miles from one of my rentals. I'm thinking if by mail, I'll get a lot of excuses with the check being lost. Direct deposit to the bank, etc? Somebody recommended I give them 12 self addressed stamped envelopes with a refrigerator magnet. What would any of you recommend?
Leo,
It would be great if you could get a direct deposit arrangement worked out.
Would be a lot less hassle. In most cases.
Or consider lossing some of the monthly cashflow to Real Estate Management Service.
This is why many landlords suggest never owning to far from where you live.
The envelope thing would be cheap and can help. Consider your late payment fee structure. Maybe next lease renewal you can up the ante a bit. That might motivate the slow payors some.
Rick G.
Hey,
Here are some points on rentals:
Repairs---Everyone seems to feel that they, the landlord, needs to know how to fix everything. And that the tenant is going to demand everything is fixed RIGHT NOW (well...they may demand it, but it ain't going to happen). None of that is true. You don't have to know how to change a light bulb, only how to dial the phone. Any repair that a rental needs, can be handled by calling a professional. This is the same as your own home. When the pipes are blocked (not the toilet, but the pipes), you call someone, don't you??? Put in the lease agreement a clause that the tenant pays the first $50 (or more) of any repair.
Handyman--A good handyman is great idea, but are very hard to find. The advantage is you can call the same person, instead of different people. I don't think it will be considerably cheaper (unless you have a lot of rentals). Search the classfieds and Home Depots boards. Talk to a lot of people. Don't take ANYONE on their word.
Using a Tenant/Manger--If you have an apartment complex (or 4-plex), you COULD use a tenant as a handyman/manager. BUT they are now your employee, and a whole new set of laws comes in to play.
Property Management--A PM charges around 8%, plus a rental fee when empty (between half and one month's rent). I think for a newbie (one or two houses) they are a waste of money, other people think they walk on water. Just be aware of the costs (monthly expense) when you are calculating your Cash Flow.
Contracts---Everything you do should be in writing. The includes the lease agreements, PM agreements and contracts for repairs.
Repairs/Improvements---Do not, do not, do not, do not let tenants do any repairs or improvements to your house (That doesn't inlcude painting. But you have to approve the colors). Every tenant thinks they are a DIY Guru and their improvement will add thousands to your property. It will not and in fact, it is going to cost you money. If they want to HIRE an licensed contractor and file for permits, etc. etc., you would consider this.
I hope this helps!
I think repairs are a major concern to newbies and veterans alike.
How does one protect against getting hit with major repairs the will take away all your profits and then some?
Requiring a tenant to pay the first $50 to $100 of a repair is helpful.
What about the more major expenses?
Is the a landlord insurance of some type that could be used for major things? Roofs, Plumbing, Electrical, Air Conditioning, ETC.
I think this was touched on once a while back.
Rick G.
Hey,
Oddly enough major system problems are the least of my concerns.
As long as you purchase the house correctly (or do the correct rehab), major system should not be a problem.
To me a major system is: roof, HVAC, structure of house, etc. Get these inspected before the purchase (or replace them) and they don't break.
Appliances (stove and dishwashers; I don't supply refrig.) can last for years and years. So if they are new or nearly new, you don't really have to worry about them.
Waterheaters are the toughest one for me. They work great and then they break. I have yet to meet one, that has an inbetween stage. They have a life of between 5 and 10 years. After some very painful (and expensive) lessons, I replace the water heater on every house I buy. I do the work myself and it costs about $150. The plumber will charge you about $400.
Plumbing and electrical doesn't break. Parts might stop working (a faucet leaks) but the whole system does not collapse. Electrical is basically a bunch of wires running through the walls. There is not much that can go wrong here. The outlets and switches might break, but then you call a repair person (and charge the tenant). On plumbing the only disaster I have ever had was frozen pipes. NOW I have a clause in my lease that explains the tenant pays for damaged pipes.
Bottom line: Inspect it right (or rehab), rent it right and you will NOT have these problems.
Clause this and clause that. Some of you think that the tenants have santa clause in their hip pocket to fix all that is wrong with the property. The low income low life scum i deal with do not fix anything. The do not even bother to call to tell me that the roof is leaking or the shower know is broken, etc. No matter what rehabb you do if the sink for the bath is under the kit sink and they are using garden hose for shower in the middle of the room. Also brand new AC will not work when the thermostat is in 100 pieces on the wall and floor and filth. Truth is that it does not get fixed and they move out get behind on the rent and leave all the problems to me including a trailer full of Goodwill furniture rejects and grease and more grease all over the kit walls and appliances ripped all apart and dead cats. Try to collect your extras for repairs and late fees in court and hear a big laugh. Sorry to be so down but repairs etc are a big concern. If you can not fix stuff get ready to pay big time for make readys and repairs. Call a plumber at 2 am and watch the cashometer jingle.
Ted Jr slumlord
Hey,
Ted has an interesting point(s).
I think ALL landlords have experienced these problems and experienced landlords know how to avoid them.
All my properties rent for $700-$950 a month, so I am dealing neither with the bottom nor the top of the economic scale. These are just middle class people.
Point one: rent right. Screen the applicants. That solves a huge part of the problem.
Point two: do quarterly or even monthly inspections on the house. Lets face facts, you have lots of time if you are just starting out. Put together a FORMAL Inspection form. It lists all the rooms and appliances. For Kitchens and Bathrooms include the sinks and plumbing. Have checkboxes (Excellent, Good, Poor, etc.). If the house is in bad shape, tell them they failed the inspection. You would not believe how upset this makes people. Tell them you will give them a week to fix the problems (grease on the walls, hair in the drains, etc.) and then you will come back. This solves most problems. If they don't fix it, then you fall back on your lease to threaten eviction.
FYI: I have never had this not work.
Also, this lets you look for things like roof problems. But the truth is, if the roof is leaking the tenant didn't cause it.
I HAVE had houses that are as bad as Ted describes. I have had tenants do $20k in damages and dissappear into the night. And everytime it happened, it was because I failed to follow these two rules.
Bruce,
Good advice.
Thanks
Rick G.
Even though my profile says I'm a Freshman (i can't seem to get this changed!) I have been in real estate for several years and have worked with a large developer so I've seen PM contracts, etc. and have been solo for a while now.
Yes - PM Cos typically charge a % of the rents. And Yes, a contract must be signed (this is to protect both you and them! Don't be afraid to mark up a contract if the terms are uneasonable to you). Depending on the size of the building and the amount of work to be done for the owner, there could be other costs involved. Always interview several PM Cos and make sure they are going to provide you with monthly, quarterly, and annual financial reports so you will always know what's going on. These reports should also include copies of the bank statements.
As far as repairs. Yes - first make sure your property is in pretty good condition to begin with. Always do an inspection BEFORE a tenant moves in (make repairs Before move in) and do a walk thru with the tenant upon move in - have them sign a walk thru list that notes any damages pre-existing. For my properties, as soon as I buy them (and this can be done for properties you already own as well) I purchase a Home Owner's Warranty. It's between $350-$475 for an annual warranty and the repairs costs only a deductible per visit. (Usually these are $40-$60). For example - I recently needed to have the A/C looked at a property. The motor was completely done! It had to be replaced. It cost me $60. It cost the home warranty co $150 beyond my $60. At another property I had to have some electrical work done (I had the contractor look at multiple issues in one trip!) - it cost me $50 (different wty co), it cost the wty co $100 above what I paid. Home Warranties cover HVAC, plumbing, appliances, garage door openers, swimming pools, hot tubs, etc. Read your policy to see what is covered and get the plan the works best for you.
This is for the bigger issues. For the smaller things ( one leaky faucet which you may or may not want to pay the $50 deductible) ask around to other investors to see who they use and how much they charge. You might even be able to share a handy man with someone. (i.e. I work with an investor who has a Full Time handy man he pays $12/hr. I call the investor to get his handy man to help me and I reimburse the investor for the time) This may or may not be less expensive depending on the circumstances.
Hope this info helps.
Jenny[ Edited by realestate411 on Date 09/17/2003 ]